The Australian Banking Scenario We Are Worried About

Loaded Up

We believe property investment loans have significantly increased in risk. Investment loans have become a “crowded trade” and are expanding above APRA’s suggested 10% annual growth limit. The housing market is now unstable, as without further house price increases, a large portion of buyers may leave the market. This is motivation for APRA’s increase in capital requirements.

Buy on yield, not on capital gains

Investment property returns should be a yield play or at least a fixed interest plus population-based price appreciation. However most yields in major Australian cities, including any tax incentives, are below the cost of property mortgages. This means it costs money, which needs to be funded by other sources, to make investments in buy to rent property. Positive returns only exist when house prices rise.

Run to the door

When further house price appreciation stops the main rationale for investors being in the housing market will disappear. This may be triggered by eventual new housing supply, a simple reduction in investment property lending or a new financial stress or recession that impacts the wider Australian economy. Further, property investors will either need to continue to pay the difference between rent and interest rates or exit the market at the same time as others.

Rent prices can’t increase

One final option is for rapid increases in rental prices. We don’t believe this will happen as wage growth, supply of apartments and a much larger proportion of investment properties need renters will keep rent prices down. Lower loan-to-value property investors will not face the same financial stress as those with high leverage. As such, we now see the housing market as unstable.

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